Good news gets better for petrol prices in South Africa
Month-end data from the Central Energy Fund (CEF) shows that a bigger petrol price cut is lined up for next week, with the over-recovery climbing higher.
Unfortunately, the data also shows that the sizeable price hike for diesel is still set, though the under-recovery has stabilised slightly lower.
The CEF’s data for the end of July shows motorists are in store for a 30 cents per litre cut to petrol prices and a 63 cents per litre hike for diesel.
While the official price adjustments will be announced before the prices take effect next week, the recovery balances for the month are unlikely to change drastically or flip before then.
These are the recoveries at the end of July:
- Petrol 93: decrease of 35 cents per litre
- Petrol 95: decrease of 30 cents per litre
- Diesel 0.05% (wholesale): increase of 65 cents per litre
- Diesel 0.005% (wholesale): increase of 63 cents per litre
- Illuminating paraffin: increase of 29 cents per litre
The good news for petrol users is that the over-recovery has maintained its positive standing throughout the month and even increased by the final week, meaning a bigger cut is lined up for August.
The over-recovery started the month in the mid- to high teens, almost doubling as the weeks progressed, thanks to declining oil prices and a resilient rand.
Petrol and diesel prices diverged in June as market volatility around the war in the Middle East impacted different oil sources, while growing diesel supply constraints pushed prices even higher.
As July draws to a close, both the oil price and the rand have moved in a negative direction for motorists. However, with only a few days left in the month, the current snapshot is the most likely outcome.
Oil prices have moved back above $70 a barrel after President Donald Trump pushed for Russia to reach a swift truce with Ukraine or face potential economic penalties.
This raised concerns that crude supplies from the OPEC+ producer could be disrupted.
Markets are also mulling the impending re-launch of Trump’s “Liberation Day” tariffs on Friday, 1 August, which could once again disrupt the supply and demand outlook.
While markets and forecasters would typically react more viscerally to these events, many question whether the Trump administration will fully follow through.
Analysts have noted that Trump wants to keep oil prices low, so the second-round tariffs hitting this week don’t make sense or align with that goal.
Regardless, the Trump administration and the White House have given no indication of blinking on the tariffs, with local markets already pricing in the incoming 30% tariff on South African exports this Friday.
Interest rates and tariffs knock the rand
The rand has been strangely resilient against the dollar over the past few weeks, maintaining a position well below R18.00/$, contributing to an over-recovery in fuel prices.
This resilience has helped push the expected petrol price cut higher, and helped keep the expected diesel price hike lower.
However, while maintaining an average rate around R17.70/$ for most of July, the rand has given up gains in the final week, currently trading at R17.93/$.
According to Investec Chief Economist Annabel Bishop, the weaker trade is being driven by unsettled markets around the new “Liberation Day” and incoming interest rate announcements.
The impact of Trump’s Liberation Day tariffs is obviously negative for South Africa and the rand.
The tariffs would cause South Africa to lose competitiveness, particularly in motor vehicle and food exports to the US, reducing export activity. They will also have knock-on effects on jobs, GDP growth and sentiment.
“If a trade deal is not reached for South Africa with tariffs around 15%, the impact of tariffs on the domestic currency would be negative,” Bishop said.
She added that the US decision on tariffs will be key for the rand this quarter (Q3), where it is expected to average R18.00/$.
However, while the looming tariffs and resultant uncertainty have pushed the rand weaker, the coming interest rate announcement by the South African Reserve Bank (SARB) is also playing a part.
The Reserve Bank’s Monetary Policy Committee (MPC) will announce its next policy move on Thursday (31 July). Economists are divided on whether to call a 25-basis-point cut or hold.
While the MPC could go either way, given the rand’s current weakness, markets are likely pricing in an interest rate cut.
Bishop noted that the United States has not cut its interest rates at all this year, while South Africa has cut twice—once in January and once in May, by 25bp each time.
This narrows the differential between US and local interest rates, reducing the relative interest rate return and thus negatively impacting the rand.
The economist noted that South Africa has room for another 100bp of cuts, given that the neutral interest rate is about 2.0% above inflation. CPI inflation is expected to be around 4.0% y/y over most of the inflation targeting period.
However, with the Trump tariffs and rand pressure at play in the market, the SARB is likely to cut only once by 25bp, either in July or September.
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